Has HgCapital Trust (LON:HGT) , which used to be regularly voted private equity investment trust of the year, lost its way?

This week’s 2013 results were deeply disappointing. A 1.6% drop in NAV, compared with a 20 per cent rise in the FTSE All-Share, helps explain the shares’ substantial underperformance for the last year.

Nic Humphries, HGT’s manager, admits it was a “very frustrating year” and has trotted out various excuses ranging from the trust’s performance being hampered by high liquidity and the relative immaturity of its relatively young portfolio after several exits of profitable investments.

But the real embarrassment was HGT’s need to write down £15.5m on three problem investments – Lumesse, a HR software group, NetNames, an internet domain manager, and Teufel, a German loudspeaker company – plus sell off, for next to nothing, Americana, a UK clothing brand, which it has owned for seven years. Throw in a £4.2m write down for adverse currency movements, and a £4m hit on renewable energy, and HGT’s performance contrasts poorly with the rest of the private equity sector.

HGT’s speciality is mid-market buyouts with enterprise values of between £50m and £500m and lower mid-market buyouts in the TMT sector between £20m and £80m. It also invests in renewable power generating projects between €10m and €50m.

HGT says that these markets offer a high volume of companies with proven financial performance and strong market positions. Its target companies are small enough to provide opportunities for operational improvement, yet large enough to attract high
quality management and to offer multiple exit options across market cycles.

HGT, whose origins can be traced back to Mercury Private Equity, is the quoted investment trust arm of the £5.2bn HGCapital Group, one of the UK’s biggest private equity firms whose motto is to “support management to grow industry champions”.

HGCapital has 100 staff, offices in London and Munich, and was long regarded as the market leader in this niche area of the private equity market. Its long-term performance remains impressive. Since 1990 it has made 116 investments, and achieved 94 exits at an average 2.5x cost, and a 36% p.a. gross IRR.

The kindest interpretation is that 2013 was an embarrassing hiccup in an otherwise stellar career, and the trust’s…

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